How to Invest $2,000 Wisely

Since you are reading this article, let me assume that you have saved some money, probably in the neighbourhood of $2000 and would like to grow it. I am also assuming that you don’t need this money right away. $2000 is good amount to start for investing. I would urge you not to invest large amounts on day one. First learn how investing works, what kind of investing strategies can work for you and then you can gradually increase the amount over time. That way if one of your strategies backfires, you will not go broke.

I must also assume that this money that you would like to invest is “Risk Free Capital”. By that, I mean even if you end up losing a part of it, your current lifestyle won’t take a hit. I always think that the market is after one’s money. If you don’t play it wise, chances are you’ll end up losing your hard earned money. This gives me the energy and passion to stay at par with the market.

Let’s discuss some ideas for how to invest your money wisely:

1. Mutual Funds: You could put the money in four-five different mutual funds, and it would grow at 5-30% a year, depending on the kind of mutual fund you choose. Please note that past performance is NOT an indicator of future success in investing. So be very careful while choosing the mutual fund to invest in. Just because a fund has returned 30% in the prior year, 30% doesn’t become guaranteed return by any chance. In order to accurately judge a fund, you should examine the kind of instruments it’s investing in.

If your risk appetite is low, you should go for a more conservative mutual fund which will return maybe 5-10% annual return and invests in more large cap stocks or even bonds. Now, that’s not too much, but this is as far as conservative mutual funds (provided they accept such low amounts) can go. If you have the ability to take more risk and don’t need the money anytime soon, a good way to invest is the no load, no transaction fee, Mutual Fund. A Balanced Mutual fund is a mutual fund that often has a 60% weighting in equities and 40% in bonds.

2. Exchange Traded Funds: ETFs or Exchange Traded Funds are financial instruments that track index, or a bunch of mutual funds, and are traded just like stocks.

A Good Sample ETF portfolio that you can start with is shown below:

SPY: S&P 500 ETF representing approximately the largest 500 US Stocks.

IWM: IShares US Small Capitalization ETF representing the smaller capitalization US Stocks.

EFA: IShares International Developed Markets including Europe, Japan and Australia.

Investing in indexes enables you to capture the broad market movement, which in the long run has an upward movement.

3. Stock Market: If you don’t want to invest in mutual funds and would like to have greater control over your investment, stick to individual stocks. With right stocks, your $2000 can give you nice returns (30-40 a year returns are not unheard of). While investing this way, you should look for a particular kinds of stock, a stock which is fairly young and has plenty of room to expand. You must also look at the record of the stock and the balance sheet of the company before finalizing. I am talking about a stock with price range $10-$20 per share. Once you have comfortably chosen a stock, the next step is to open a brokerage account with brokerages such as Tradeking or Zecco, that have zero minimum opening deposit. This way you won’t be wasting your valuable savings just to open an account.

4. If you are in college and have saved at least $2000, I would advise you to go and invest in the stock market. You are young and you can take more risks than someone who is close to retirement has is planning to start a family soon

If you are going to invest in the stock market, often times, you would be confused which stock to pick. Best way to figure out which stocks to trade and decide how to invest is to network with the right kind of people who have extensive experience in the field.. You should take a look at TradeStreet, where you can subscribe to the trade ideas from really successful people, discuss your trade ideas with fellow traders, get their opinions before investing.

About the Author:

Punit Gupta is an entrepreneur and full time stock trader. Punit specializes in building startups by bootstrapping. Currently Punit is developing a brokerage comparison platform and a stock traders networking platform. Punit attended the Georgia Institute of Technology, Atlanta and worked with an Atlanta based startup for 7 years before quitting his job to start his own venture.

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hehe look everyone is different. You gotta assess your risk appetite and operate based on that.

No clue about your background, but if you have savings or some spare cash, I would say try out some risky bets. But again thats only allowed when you can afford to lose some. Almost everyone tends to do stupid mistakes when they begin to trade. Thats the whole point of TradeStreet i.e. help people minimize their mistakes while investing

This is a well written post. I’m not 100% sure who your audience is, I’m assuming an inexperienced investor, since you are going over basics. One thing I would like to point out is that you do not cover the downside. All that is mentioned is that you could earn 5-30%. If you are conservative, stay on the 5% side. The reason you should do this is because the more you can earn, the more you can lose. I see that the writer says the reader should use funds they can afford to lose, but downside is not specifically addressed. This is just my opinion, of course. Thanks for ‘listening’.

You are right, more details could have been mentioned on the downside exposure. Thanks for your comment on that front. Just to answer your concern, you should always watch out for downside. Lot of people on an average set their stop losses around 8-10%. So cut your losses if your loss gets to around that level.

Most people who get burned in the market get there because of their tendency to hold onto their losers.

It’s hard to figure out from your article if you are suggesting actively managed mutual funds or passive index funds. Actively managed funds are definitely NOT the way to go – they have horrible performance track records and steep expense ratios.

I would also caution investors with only $2,000 against buying too many investments from a commission-based broker. Trading costs will start to eat away at your profits if you are trading less than $1,000 per transaction.

Thanks for your feedback Anton. At the end it all boils down to your risk appetite. Passive mutual funds (index based etc) are very conservative and are usually considered a safe choice for investment.

Also I do not agree with your statement that managed funds are a bad choice by default. There will be fund managers who are great at delivering results. Granted they could also have bad years but then all investments carry risks. So the art of choosing mutual funds is unique and you learn that overtime. Again if you are someone very conservative in terms of investment risks and don’t have time to research on your own, I would say go for passive mutual funds. Otherwise get into the research mode and take some risks

I don’t think it’s a question of risk at all, but a question of performance. Actively managed funds have horrible track records compared to their passive benchmarks. Yes, there have been great fund managers in the past but they are few and far between. If I am looking to invest in US small caps, why would I choose an actively managed fund if it’s very likely it will do worse than a comparable index fund (and cost more in the process)?

Active managed funds are also very dependent on their managers. If management changes, the performance of my fund may drastically decline. An index fund is not susceptible to this.

And as far as risk goes, you can tailor an index fund portfolio to suit your needs/preferences. There are lots of different indeces that cover a wide range of asset classes and offer different risk/return combinations.

At some level I agree with you. Basing your investment on broad market does have benefit that it guarantees minimum level of return over time. On the other hand actively managed funds can get more aggressive and can potentially return you higher %. But you got to be careful in choosing the right fund and watch it I guess.

Do you have any reference to support your claim btw for managed funds being terrible? (Not disagreeing with you just wanna see the numbers)

Year-end 2012 surveys shows over 66% of active domestic equity funds outperformed by benchmarks (and it was a good positive year too). Combine that with the fact that 6% of active funds ceased to exist and 23% weren’t consistent with their style and it doesn’t paint a very pretty picture.

Investing in stock market while you are young would be a great decision than buying the latest gadgets or eating at fancy restaurant. The stocks have highest return than any investment asset over the long term. If you can stomach the market swings, you will see the highest return on your money with the stock market.